Description

Buy BCA Marketplace (BCA LN), a whole car auctioneer that is: (1) competitively advantaged, (2) a HSD% top-line grower over the next 3+ years due to upcoming cyclical tailwinds coupled with share gains, (3) recession resistant, and (4) trading at a disrupted valuation (15x P/E relative to mid-teens EPS growth and a historical trading range at 18x-22x P/E) due to technical pressure given its low liquidity and being an underfollowed equity.

Business

BCA LN provides whole car auction services in the UK and Europe.  If you’ve followed KAR and its ADESA business unit in the US, then you are familiar with this business.  The company’s physical and online marketplaces bring together used car sellers and buyers, charging transaction and other ancillary fees to both parties.  Founded in 1946, BCA is the market leader with 60% share in the UK and ~50% share in other European markets. Auction sellers include car dealers (who auction vehicles that customers bring in as partial payment for a new car, called a “part-exchange” vehicle) and corporate lessors (who auction vehicles at the end of lease).  Buyers are largely independent used car dealers.

The company was purchased from Clayton Dubilier & Rice on 4/2/15 by private investors, including Invesco, Aviva Group, Neil Woodford and others.  The owners supported current CEO, Avril Palmer-Baunack, an auto industry veteran in the UK.

UK Vehicle Remarketing, which provides whole car auctions in the UK, comprises ~60% of EBITDA.  International Vehicle Remarketing, which comprises auction services in Germany, France, Italy, Spain, Switzerland and other European countries, is ~20% of EBITDA.  The remainder of the business is split between (1) WeBuyAnyCar (WBAC), which purchases used cars direct from consumers before selling them on the company’s auction, and (2) Automotive Services, which processes, transports, refurbishes vehicles and provides other services to auction participants.

Thesis

1. Competitively advantaged – BCA LN has the following competitive advantages, enabling market share gains over time:

• Scale – company’s 60% market share is 2.5x its next largest competitor, translating into market leading liquidity that enables: (1) auction prices 100 to 200 bps higher than peers and (2) a natural barrier to entry, given its inherent network effect (sellers won’t want to sell anywhere else regionally given any competitor’s suboptimal buyer base, and buyer’s won’t want to buy anywhere else given a suboptimal seller base and more limited inventory).

• Scarce assets – competitors like ADESA have not been able to gain traction in the UK market b/c they lack physical presence (e.g., car storage, transporters, etc).  Cars are quickly depreciating assets, so being able to have the assets to move the cars quickly is paramount in gaining best price. BCA LN has locked up these assets, with 45,000 parking spots and 800 transporters (more than the #2 to #4 transporters combined).

2. Revenue compounds at HSD% given (1) cyclical tailwinds, (2) customer-driven share gains and (3) the WBAC segment

• Cyclical tailwinds – dealer-sourced cars represent ~45% of BCA LN’s auction volumes, and are driven by privately sold vehicles aged 5-10 years.  Given the timing of private vehicle sales in the UK (which dipped during the great recession in 2008, and also in 2011), this 5-10 year aged cohort has declined every year from 2011 to 2017.  However, an inflection point was reached in 2018, suggesting this targeted vehicle group should now grow through 2022.

• Customer-driven share gains – key customers like Pendragon, Lex Autolease and Volkswagen (to which BCA LN is over-indexed) should continue to drive share gains.  In addition, BMW just signed an exclusive agreement to use BCA LN for all of their off lease vehicles. Pendragon, a car dealer who sells off-lease vehicles to BCA LN, has successfully been working on its goal to increase market share from 5% (FY ’16) to 10% (FY ’21).  Lex Autolease, a vehicle lessor, increased its fleet size much faster than market to meet a FY ’17 goal. Volkswagen’s % of cars financed increased from 30% (FY ’10) to 55% (FY ’17). Given the lag between these customers’ sales and when the cars wind up on auction, all these customers should support BCA LN share gains through FY ’21.

• WeBuyAnyCar (WBAC) – this segment is ~15% of sales, and is growing sales in the mid-teens %.  Growth is driven by share gains due to convenience and institutional nature of transaction, and WBAC’s competitive advantage of being tied directly with BCA LN’s auction sites.

• Our projection of HSD% sales growth is not just a theoretical calculation… it’s a continuation of historical trends (despite the cyclical headwinds that are now becoming tailwinds).  The company’s sales CAGR from 1998 to 2017 was 7.4%.

3. Recession resistant

• Sales grew during the early 1990’s recession, the great recession in 2008, and the UK slowdown in 2011.  This sales strength has been driven by share gains, and the natural hedge that in bad times, cheaper used cars become a better alternative to more expensive new cars.

4. Disrupted valuation due to technical factors

• The company’s P/E valuation has dropped from ~19x in August 2018 to ~15x currently, despite no change in fundamentals.  Historically, BCA LN has traded at 18x to 22x P/E. The reason for this valuation disruption is (1) the CEO (Avril) sold 5mm shares, leaving her with ~9mm remaining and (2) Woodford Investments (the 2nd largest shareholder w/ ~15% of shares outstanding) has been selling.

• CEO’s (Avril’s) share sales – Avril sold shares in September 2018 for what seems to be a valid personal reason.  She sold the shares as a block which acted as an overhang on the stock instead of through a continuous program which may have had less of an impact.  Given Avril decided against selling the company to Apax Partners, who submitted a 200 pence per share preliminary offer in June 2018, it seems unlikely to us that she would not have sold the company and all of her shares only 3 months before this sale if she had concerns over BCA LN’s future.

• Woodford share sales – Also in September 2018, Woodford Investments filed that its ownership (previously at 16%) dropped to below 15%.  We do not believe this suggests Woodford has any BCA LN concerns, but instead is driven by Woodford Investment’s recent challenges and AUM pressures, which are widely reported in the press.

• These share sales have an outsized impact on BCA LN’s valuation, given the company’s low liquidity, lack of sell-side coverage, and lack of earnings calls or any other forum to discuss these changes (typical for UK companies of its size).

Risks

• Brexit destabilization – this is a risk for any investment in the UK.  However, BCA LN’s valuation discount is driven by company specific reasons, as opposed to any macro driven sell off.  Thus, you could argue that Brexit risk is already priced into the stock. Further, BCA LN has historically proven recession resistant, mitigating any potential recessionary impact.

• Diesel emission regulatory changes – the UK government has made diesel cars more expensive through regulation, given the view that diesel vehicles are excess polluters.  While this lowers diesel vehicle sales, it only leads to an offsetting increase in petrol sales, so should not impact volumes once these cars transition to the used car market.  Further, even if regulation negatively impacts diesel residual prices, BCA LN doesn’t take much risk on used car prices, so any impact should be limited.

Catalyst

Earnings growth